Section 199 Loophole Will “Definitely See A Fix”

In the next week we may see action that would impact the new 199A section of the Tax Cuts and Jobs Act, which was passed in December.

As in the AgDay clip above, Paul Neiffer, CPA and principal at CliftonLarsenAllen explains that the provision was added at the very last minute and comes with unintended consequences, and he says will “definitely see a fix.”

Tax staff members of the Senate Finance Committee, in consultation with the House Ways and Means Committee, have started to draft legislative language to enact a solution. The National Grain and Feed Association (NGFA) reports the goal is to provide that legislation as part of the February 8 funding bill or as part of other spending bills likely to be considered during the month of February.

NGFA says that in the month of January its efforts have intensified to “collaboratively to develop an equitable and expeditious solution to the unforeseen marketing-disruptive impacts created by Section 199A of the Tax Cuts and Jobs Act.”

Section 199A, which gives farmers the ability to deduct up to 20% of their total sales to cooperatives could make it more profitable for farmers to sell to cooperatives than independent companies, says Jim Wiesemeyer, ProFarmer’s Washington policy analyst.

“[The new version] is a more generous version of a deduction that owners of pass-through businesses, such as partnerships and S-corporations, get in the law,” he says. “Farmers would get a smaller deduction — about 20% of income — if they sell grain or other farm products to privately held or investor-owned companies.”

A farmer has $500k in gross grain sales (140,000 bushels) and $100,000 in net farm income, all from selling grain. If she markets through a cooperative, she anticipates a patronage allocation of $0.025 cents per bushel, or $3,500.

Choice A: She markets the crop to an independent grain firm or processor and, through Sec 199A, she deducts up to 20% of her QBI: 20% x $100,000 = $20,000 potential deduction.

Choice B: If she markets the crop to her cooperative, she deducts up to 20% of gross sales (20% x $500,000 = $100,000) because they qualify as per unit retains, plus 20% of any qualified patronage allocation (20% x $3,500 = $700). The potential deduction is $100,700.

At a 22% marginal tax rate based on selling to an independent marketing firm or processor (Choice A), the deduction difference between these two choices is $80,700, which equates to $0.12 per bushel in taxes. Estimates from tax professionals working with producers is that the tax effect may range from $0.05 - $0.20 per bushel.

A statement concerning the new 199A section of the tax bill passed in December was approved by the Board of Directors for the Agribusiness Association of Iowa promises that the group is continuing to work to bring the 199A provision back in line with the intention expressed by federal legislators.

It reads, “AAI is supportive of the efforts of NGFA and NCFC to resolve this issue quickly and equitably, maintaining and preserving, to the extent possible, the benefits that cooperatives and their customers previously enjoyed under Section 199.”